Wednesday, November 20, 2013

FYI: 7th Cir Soundly Rejects "Forced Place" Insurance Claims

The U.S. Court of Appeals for the Seventh Circuit recently rejected a borrower's assertions that a lender fraudulently placed insurance on her property and supposedly received an improper "kick-back" in connection therewith, finding that the lender's actions were provided for by contract, and therefore not fraudulent.

A copy of the opinion is attached.

A borrower executed a loan agreement with a lender providing that she was required to maintain property insurance on the subject property. The agreement also provided that the lender could purchase insurance for the property should the borrower fail to do so; that such insurance could cost more, and provide less coverage, than insurance purchased by the borrower; that the costs for such insurance would be passed on to the borrower; and that the premium might include compensation for the lender.

When the borrower's insurance lapsed, the lender sent her several letters requesting that she provide proof of insurance, and noting that should she fail to do so, the lender would purchase insurance for the property and charge the borrower.

The borrower did not respond to the lender's letters, and the lender secured an insurance policy for the property. The borrower then sued both the lender and the insurance company who issued the policy, alleging that their conduct was fraudulent and deceptive because among other things, they did not disclose that the lender was receiving "kickbacks" from the insurance company. In connection with this claim, the borrower advanced claims for violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (the "ICFA"), among others.

The lender and the insurance company moved to dismiss for failure to state a claim, advancing several alternative grounds for dismissal. The lower court held that the borrower's claims were preempted by regulations issued by the Office of Thrift Supervision, and the filed-rate doctrine, and granted the motion to dismiss. The borrower appealed.

On appeal, the Seventh Circuit began by noting that it was not clear whether the lender's preemption and filed-rate doctrine arguments were well-taken. However, the Court found it unnecessary to reach the issue, as it held that dismissal of the borrower's complaint was proper in that the borrower failed to state any viable claim for relief.

Specifically, the Seventh Circuit held that "[t]he loan agreement and [the lender's] disclosures, notices, and correspondence conclusively defeat any claim of fraud, false promise, concealment, or misrepresentation." Accordingly, the Court determined that there was nothing "unfair" or "deceptive" about the lender's conduct, and thus found the borrower's claims under the Act failed.

The borrower argued that the lender's actions were coercive even if they were not deceptive - and thus sufficient to state a claim for "unfair" conduct under the ICFA. The Seventh Circuit again disagreed, observing that "putting a party to the choice specified in the parties' contract...is not coercion." In addition, the Seventh Circuit emphasized that the borrower at all relevant times had the right and the opportunity to purchase her own insurance, but failed to do so.

Next, the borrower argued that the commission paid to the lender by the insurance company constituted an illegal "kickback." However, the Seventh Circuit observed that "simply calling the commission a kickback doesn't make it one." The Court therefore reviewed the applicable case law, and determined that "the defining characteristic of a kickback is divided loyalties" - in that "an agent charged with acting for the benefit of a principal accepts something of value from a third party in return for steering the principal's business to the third party." See Johnson v. Matrix Fin. Servs. Corp., 820 N.E.2d 1094, 1100 (Ill. App. Ct. 2004).

Here, however, the Seventh Circuit found no evidence of divided loyalties. Instead, the "lender was subject to an undivided loyalty to itself, and it made this clear from the start."

Accordingly, the Seventh Circuit found little merit in any of the borrower's arguments related to alleged "kickbacks" - which included claims for breach of contract and common-law fraud.

As to the breach of contract allegations, the Seventh Circuit noted that "[n]othing in the loan agreement...prohibits [the lender]...from receiving a fee or commission when lender-placed insurance becomes necessary."

As to the common law fraud allegations, the Court observed that the common premise among the borrower's various allegations in connection therewith was that had she known of the alleged kickbacks, she would not have paid the premiums for the lender-placed insurance. The Seventh Circuit termed this argument "senseless," in that "[l]osing an opportunity to breach a contract cannot constitute a cognizable fraud harm."

Accordingly, the Seventh Circuit affirmed the decision of the lower court, on the grounds that the borrower failed to state a viable claim for relief.

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.